Effective Performance Evaluation Methods for Employee Feedback and Improvement

1. ECON 308 Week 14 Chapter 16: Individual Performance Evaluation

2. Performance Evaluation • Evaluations provide employees feedback on achievement and ways to improve • Evaluations are used to determine rewards and sanctions • Performance evaluation entail evaluating employees as well as subunit of the firm 16-2

3. Implicit Assumptions • Principal knows agent’s production function • Output is single quantitative measure of performance • Output can be observed at zero cost • Employee cannot game the measure • Employee produces a single output • Mutually beneficial contract is feasible • Employee works independently 16-3

4. Setting Performance Benchmarks • Time and motion studies • Engineers estimate the amount of time a task requires • Determines most effective work method • Past performance and ratchet effect • Employees have incentives to only meet the goal and not exceed it 16-4

5. Measurement Costs • Accounting system may need to be developed • Information systems improved • Value-maximizing firm improves measures as long as incremental benefits justify costs 16-5

6. Opportunism • Gaming • Employees may engage in dysfunctional activities to improve their evaluations • Horizon problem • Short-run objective performance measure may cause employees to focus on results that influence their evaluation only over their remaining time with the firm 16-6

7. Relative Performance Evaluation • Evaluate worker output relative to their co-workers in the same job • Within the firm • jobs not always identical • group has incentive to punish “rate busters” • incentive to hire less competent workers • Across firms • data hard to obtain 16-7

8. Subjective Performance Evaluation • Firms often use subjective evaluation along with objective measures • Multiple tasks and unbalanced effort • Workers have incentives to concentrate on activities that are easily measured • The subjective measure will allow the supervisor to determine cooperation and other difficult to measure activities 16-8

9. Subjective Evaluation Methods • Standard rating scales • Rank employees on various performance factors • Goal-based systems • Set annual goals and then measure whether the employee achieved them • Frequency • Often more frequent reviews are too costly • May be beneficial with new hires 16-9

10. Problems with Subjective Evaluations • Supervisor shirking • Forced distribution • May result in good employees being evaluated poorly • Influence costs • Reneging 16-10

11. Combining Performance Measures • Few job performance measures are purely objective or subjective • Both types can be inaccurate • increasing inaccuracy of either places greater weight on other • inaccuracies increase employee risk • Both can induce dysfunctional behaviors 16-11

12. Comparing Individual and Team Output Q Conrad and Dina’s team output Sum of Conrad’s and Dina’s individual outputs Expected output 25 e 2.5 Conrad’s and Dina’s individual effort levels 16-12

13. Government Regulation of Labor Markets • Anti-discrimination regulations dictate clear performance evaluation systems • May be inconsistent with value maximization 16-13